Pricing Risk in Corporate Pension Plans: Understanding the Real Pension Deal

8 Pages Posted: 23 May 2009

See all articles by Roy P. M. M. Hoevenaars

Roy P. M. M. Hoevenaars

APG Asset Management

Theo P. Kocken

Cardano Risk Management

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 20, 2009

Abstract

New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from defined benefit plans to a variety of collective and individual defined contributions plans. Most of these shifts have been ad hoc and not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shift from a typical defined benefit plan to a collective defined contribution plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate of four percent of pay.

Keywords: Embedded Options, Collective DC, Pension Deal, Pension Fund, Value-Based Asset LiabilityManagement, Rotman

Suggested Citation

Hoevenaars, Roy P. M. M. and Kocken, Theo P. and Ponds, Eduard H.M., Pricing Risk in Corporate Pension Plans: Understanding the Real Pension Deal (May 20, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1408677

Roy P. M. M. Hoevenaars

APG Asset Management ( email )

P.O. Box 75283
1070 AG
Amsterdam
Netherlands
+31206048313 (Phone)

Theo P. Kocken (Contact Author)

Cardano Risk Management ( email )

Beurs World Trade Centre, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

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